Toughest Olympic Event: Turning a Profit

By Jack Hough

During this Summer Games, a gifted few will run short bursts at over 25 miles per hour, lift triple their body weight overhead or jump nearly eight feet into the air. But no one will ever be talented enough to calculate a precise financial return on London’s Olympic investment.

If someone could do the math, evidence suggests the return would almost surely be negative. That’s OK. Weddings have negative financial returns, too. People still like them.

Mayors should stop pitching the Olympics to voters as a money-maker, and call hosting for what it is: A chance to blow $10 billion to $20 billion on brief joy and a generation of fond memories. That’s less than the cost of a midsize bank bailout or three months of war. I’ll take the high-jumping, thanks.

The main reason for applying to host the games, according to the International Olympics Committee, “lies in the possibilities for economic development and tourism inherent in such an event.”

But think of it: Football would be a lot less profitable if teams had to build new stadiums each season. Olympic hosts do the equivalent, while spending lavishly on security, public transportation and much else. Just putting together a bid for the games cost London $14 million.

The cost/benefit projections of Olympic hosts tend toward the creative. Many label the cost of construction as a beneficial “economic impact” that will multiply into future revenues. The current tenants of Beijing’s $480 million “bird’s nest” arena – if there were any — might point out the flaws in that approach.

True, Olympic host countries tend to enjoy a burst of economic growth after the games are done, but be careful telling cause from effect. Prospering countries are more likely than others to bid, after all.

A 2009 study by researchers at U.C. Berkeley and the Federal Reserve found that countries that lose a bid to host grow just as nicely as those that win. A 2010 study compared bid winners with losers and found “no long-term impacts of hosting” on economic growth or trade.

One of the authors of that study, Scott Holladay, an economist at the University of Tennessee, says that London will lose money on its investment, but not nearly as much as Beijing. Hosts that lose the least are generally those that already have much of the infrastructure in place, he says.

Los Angeles is widely believed to have turned a small profit in the 1984 games, but crucially, it was the only bidder for that year’s games. That helped it avoid what Mr. Holladay calls the downfall of most hosts: the “winner’s curse,” or the tendency of auctions to be won by those who pay too much.

The math doesn’t look good for Rio de Janeiro in 2016. Its winning bid came with a $14 billion plan that nearly totalled the sum of spending for the three competing bids. That’s $700 per taxpayer, or close to a month’s salary for an average worker. Rio’s best hope for containing costs may be in learning from some new building tactics used in London, including the use of temporary structures that can be downscaled or relocated after the games.

Mr. Holladay says the bidding process has become an arms race, and developing nations are increasingly using the games to showcase their arrival as economic powers, even though these countries are likely to see the largest financial losses as hosts. “We’ll see more Beijings and fewer L.A.s in terms of returns,” he says.

That would be a shame. In mixing in more developing nations as hosts, the International Olympic Committee should emphasize thrift, not extravagance, when reviewing bids. Hosting isn’t profitable, but it needn’t be squanderous, either.

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